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Top marks must go to lenders for good job in tricky times

The Bank of England’s latest figures show the average rate on a two-year fixed deal has risen. On the face of it, with the base rate stuck on the floor and LIBOR falling steadily since January, rising mortgage rates seem bizarre, or even perverse.

Recent rises in the cost of funding have seen lenders crank up their rates by between 0.1% and 0.4%, which means that potential bills for new home buyers hoping to make their way on to the property ladder are growing at a unwelcome time.

Add to this the fact that the NewBuy Guarantee scheme has so far stuttered into life in the form of expensive mortgages and one could be forgiven for thinking lenders have brought in higher rates on a whim.

But the reality reflects the impressive performance of the mortgage market over the past year.

Although it’s easy to moan about the fact that lending is still far below the pre-crisis peak, the current level of activity represents a triumph against adversity.

This was achieved as lenders faced a possible funding implosion as a result of a eurozone default in an economy already suffering from high inflation, dwindling public spending and rising taxes and unemployment.

What’s more, despite anaemic growth in Q1 2011, lenders responded to the prospect of a low base rate for years to come by offering mortgages at an unprecedentedly cheap rate.

The CML’s data shows interest rates as a percentage of income in 2011 were at 10.8% lower on average than during any year since its records began in 1974.

The lowest recorded ratio was 10.3% in October and November last year.

Lenders’ behaviour has been characterised by their willingness to make the best of a tricky situation

Before complaining that lenders are making arbitrary hikes in mortgage rates, it’s necessary to give consideration to the historically low base from which rates are rising.
Payments as a proportion of income are currently 10.8%, compared to the 10-year average of 13.6%.

Lenders, having pushed their margins to offer low cost finance to house purchasers, always faced a struggle to maintain the record-breaking affordability of finance.

With rates creeping up on deposit savings and wholesale funding costs rising – not to mention the UK is in recession – the mortgage rates being offered do nothing to alter the fact that the behaviour of lenders over the past 18 months has been characterised by their willingness to make the best of a tricky economic situation.

It is unfair to pillory lenders for failing to offer affordable finance while at the same time stamping on any suggestion that they are taking excessive risk.

Amid choppy conditions, they are being forced to navigate a narrow channel between sustainable lending and supporting the market.

So far, they’ve done a remarkably good job. While complaints are inevitable when rates rise, those who bemoan the state of the market should consider what the alternative might have been had lenders been less proactive.

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